The board of directors of JJB Sports has announced a series of proposals to help the struggling British sports retailer to meet its cash flow problems for the short and medium term. A new equity increase would be carried out on Feb. 22 to address the immediate funding needs. This would be followed by the closure over the next two years of between 45 and 95 out of the company's 250 stores in the U.K. and the negotiated reduction in their leases, but the board has indicated that a further equity increase may become necessary at a later stage.
The new proposals will be submitted to approval by shareholders at a general meeting tomorrow (Feb. 18). They follow the previously announced discussions about a possible offer by JD Sports Fashion for all of the company's shares. As it turns out, JJB's board received unsolicited inquiries last December from JD as well as other potential investors. Discussions have been pursued only with JD, but JJB's board said that their very preliminary nature had led it to make the new funding proposals to avoid bankruptcy or liquidation.
Bankruptcy or liquidation are still possible if some of the new proposals are not accepted, including a new round of so-called Company Voluntary Arrangements with the landlords of JJB's stores and other creditors. This typically British scheme would allow it to continue to pay reduce rental fees on the stores due to be closed for only a limited time, making monthly instead of quarterly payments. On the other hand, JJB would vacate the premises within 30 days if a landlord finds a new tenant.
The company already used CVAs in April 2009 to shut down 140 unprofitable stores. This time, JJB intends to apply it first to a group of up to 45 under-performing stores that it wants to shut down within the next 12 months. Another 50 stores would be kept under review for up to two years with an option to shutter them on the same terms.
The new CVA scheme follows a comprehensive review conducted by the new management appointed last March, which has identified a core group of 150 stores that are operating satisfactorily. As in 2009, the CVA program must be approved by shareholders representing 50 percent of JJB's equity and by unsecured creditors representing 75 percent of the debt. However, JJB says it has already had constructive talks with landlords who are getting about 40 percent of its rental payments.
JJB's two major shareholders, Harris Associates and Crystal Amber, have already endorsed a separate new refinancing proposal, first broached by the board last Dec. 23 and formally announced on Feb. 2. This proposal would entail a near-doubling in the company's equity through the issue of 630,000 new shares at a price of 5 cents, 25 percent higher than the closing price on Dec. 22 but similar to JJB's more recent performance on the London Stock Exchange.
Trading in the stock has been brisk in the last few days. Prudential has acquired 9.95 percent of JJB's shares. Others, including two directors of JD, have made investments in the company. JJB's board intends to seek a transfer of the company's ordinary shares from the official list of the London Stock Exchange's main market to its AIM counter by the end of April.
The planned equity increase would be carried out through a so-called firm placing and a placing and open offer of shares and warrants. It would raise gross proceeds of £31.5 million (€31.5m-$50.5m) that would be used mainly to meet short-term working capital requirements. Short of taking over control, Harris Associates and Crystal Amber would see their respective shareholdings grow from 20.0 to 33.3 percent and from 15.8 to 18.0 percent if they will be the only ones to exercise their warrants. As part of the refinancing package, JJB's main lender, Bank of Scotland, has already agreed to waive some loan covenants on its credit facility through next April.
A prospectus filed with the new capital raising proposal says that continued operating losses have eliminated JJB's cash headroom in spite of various measures taken after the appointment of Keith Jones as chief executive last March 1. These included the development of a new store format, the launch of a new online store, the identification of a strong Asian manufacturer for private label products and the development of new exclusive product ranges with key suppliers such as Livestrong and Nike.
The new store format has been successfully tested on six stores, but JJB lacks the financial resources to roll it out at a later stage. Furthermore, the prospectus indicates that a new cash shortfall may occur next April when its credit facility will be fully drawn to finance purchases of new products for the spring selling season.
A final restructuring plan is set to be delivered by Feb. 24, but JJB will certainly need more financing to achieve a lasting turnaround. The retailer raised around £100 million (€118.8m-$160.5) from its shareholders in October 2009. However, the latest prospectus reveals, much of this money was spent to restock the depleted stores, and long-standing inefficiencies in range specification and ordering systems prevented the group from purchasing adequate levels of certain products and from distributing the right products to the right stores. The resulting lack of inventories has caused JJB to operate at a competitive disadvantage, failing to maximize sales, the prospectus says.
